Lenders’ request to move some AFS securities to HTM category ignored

The Reserve Bank of India has not responded to banks' requests to allow them to move some of their securities classified under the available-for-sale category to the held-to-maturity category, several bankers told FE.

Concerned over rising bond yields eroding banks’ treasury income, FIMMDA made the request to the RBI on behalf of banks. (Reuters)

The Reserve Bank of India (RBI) has not responded to banks’ requests to allow them to move some of their securities classified under the available-for-sale (AFS) category to the held-to-maturity (HTM) category, several bankers told FE. “As of March 31, we have not heard anything on that from RBI,” a senior executive with a large public sector bank said. Concerned over rising bond yields eroding banks’ treasury income, the Fixed Income Money Market and Derivatives Association of India (FIMMDA) had made the request to the RBI on behalf of banks.

Banks are required to adjust securities held by them under the AFS category to reflect their value as per prevailing market rates. This is not the case for HTM securities, which bear the yield set at the time of issuance right up to the time of maturity. If accepted, the representation could have helped banks salvage their January-March bottom lines to some extent as their marked-to-market (MTM) losses would be reduced.Profitability at banks, especially at state-owned lenders, is widely expected to be hit by the uptrend in bond yields.

After the government demonetised high-value currency notes on November 8, 2016, banks received a deluge of deposits, which led to a sudden jump in their net demand and time liabilities (NDTL). This, in turn, led to banks increasing their holdings in government securities in order to comply with the statutory liquidity ratio (SLR) requirement of 20.5% of NDTL.

The effective SLR in the system stands between 27% and 28%, the banker quoted above said.Banks’ investment in SLR securities has risen 5.6% between October 28, 2016 and March 31, 2017 to `30.44 lakh crore, lower than the January 6 peak of `36.31 lakh crore. Holdings in SLR securities began to fall in January as short-term bonds issued by the RBI in December under the market stabilisation scheme began to mature.

Bond yields have followed an upward trajectory ever since the RBI changed its stance to ‘neutral’ from ‘accommodative’ at its February 8 policy. The benchmark 10-year government bond closed at 6.822% on Thursday, as against 6.430% on February 7.

In a note dated February 27, Deutsche Bank reduced its FY18 earnings estimates for most large banks by between 3% and 8%. “Even for FY18, we are currently building in 0.7-1% of the investment book as gains. However, with bond yields now moving up, this may be at risk. PSU banks, especially smaller banks, are more exposed,” the investment bank wrote.